Reply To: Tyler Cowen and ABCT


Critics of the ABCT tend not to describe it accurately. Here is Bob Murphy on Cowen’s view of ABCT.

On monetary contractions, Cowen is saying that the ABCT postulates an inflationary boom before the monetary contraction of the bust. So, he says, what about historical episodes in which there is a monetary contraction without a previous boom? Surely, the ABCT cannot explain them.

It’s an open question as to whether or not there are historical cases of such monetary contractions. We would have to look at the evidence to see. If there are, then the ABCT would not explain them. We would need to construct a theoretical explanation that takes account of the features of the actual case. What is causing the money supply to contract? Are financial markets affected and, if so, how? How does the monetary contraction affect banks and money substitutes, etc.?

Here is Roger Garrison’s article on Milton Friedman’s “plucking” model of recessions.